Stocktake: Investors shrug off QE concerns


The US Federal Reserve announced last week that quantitative easing (QE) was finally over, an event investors seem to have taken in their stride.

Granted, the move was no surprise. Still, the recent equity rally, and the collapse in volatility, is notable on many fronts.

A year ago, markets were roiled by talk the US was to begin tapering its $85 billion monthly bond-buying programme.

In contrast, the S&P 500 soared by 9 per cent in the fortnight leading up to last Wednesday’s announcement.

The recent volatility spike has been remarkably short-lived, with the Vix, or fear index, more than halving.

Is this sustainable? Even if stocks march higher, the ride will surely be bumpier than in recent years, when volatility was subdued by QE, to levels way below historical norms. The fact US equities now look frothy only adds to this concern. Nevertheless, market breadth looks much healthier than in recent months. The number of stocks making new three-month highs is greater than the number seen at September’s peak.

Expanding breadth is not associated with near-term peaks, and indicates investors believe the five-year bull market can survive life without QE. Seeing the upside in Europe European indices have also advanced, but it seems more like an oversold bounce than a fresh assault on new highs. Since March, the Iseq has been making lower highs and lower lows; the FTSE 100 has barely regained half of its recent losses; the Euro Stoxx 600 remains well shy of September’s peak.

No surprise, perhaps, given Europe’s obvious macro concerns.

However, pessimism may be overdone. The ECB may yet embrace full-blown quantitative easing.

Valuations look undemanding, and well below US levels. Euro Stoxx earnings are projected to grow 10 per cent, despite a slight decline in revenues, indicating the scale of corporate cost-cutting. Clearly, when revenues finally begin to rise, earnings will jump higher.

Additionally, two-thirds of Euro Stoxx companies have beaten estimates in the current earnings season.

The potential for European upside is obvious and the downside appears limited. One cannot say the same about US equities, despite Wall Street’s current ebullience.

Unprecedented valuation In February, this column noted WhatsApp’s “unprecedented” valuation.

Facebook had shelled out $19 billion for the messaging app, which many thought might have trailing revenues of just $200million or so.

In fact, Facebook confirmed last week, WhatsApp’s revenues last year were just $10 million. That means Facebook paid $55 per WhatsApp user, even though each user generated just a few cents in revenue.

Facebook’s gamble may yet pay off – WhatsApp now has 600 million users – but the valuation is even more unprecedented than imagined.

The trouble with timing Market-timing can be tricky, as high-profile investment newsletter writer Dennis Gartman is discovering.

At the bottom of the recent correction, Gartman said a bear market was beginning only to admit a week later, following a sharp rally, that he was wrong.

In August, he admitted his recent predictions had been “terrible”, adding: “The market is telling me that I’m wrong. I’m going to the sidelines.”

In May, he said he was “silly” for predicting a correction, having warned in February of a “very severe, very substantive and really quite ugly correction that will probably make a lot of people wail and gnash their teeth before it’s done”.

Some headlines from 2013: In September, “Gartman admits he got gold and stocks all wrong”; in August, “I timed the stock market wrong”; May, “Gartman admits he was wrong”; April, “I was wrong . . . Now selling gold”; and March, “I was wrong exiting stocks”.

For what it’s worth, Gartman told CNBC last week crude oil would “go the way of whale oil”. A month earlier, CNBC headlined, “Gartman: Don’t be bearish on crude oil”.

Perhaps Gartman should heed the advice of finance commentator Morgan Housel. “Maybe just stop guessing?” he tweeted. Market breadth looks much healthier than in recent months Companies headed by golf enthusiasts are less profitable and suffer from lower market valuations.

That’s according to “Fore! An analysis of CEO shirking”, which calculates the most frequent players play a minimum of 37 rounds a year – equivalent to about 220 hours, or roughly 5.5 weeks of work.

One S&P 1500 chief executive played an astonishing 146 rounds.

Such chief executives, the study suggests, are slackers, and their firms suffer accordingly.

It mentions the case of former Bear Stearns chief James Cayne, who spent 10 of 21 days away from the office playing golf or bridge in July 2007, the same month two Bear Stearns hedge funds collapsed.

This isn’t the first such study. A 2010 paper found firms headed by golfers performed worse than non-golfers, with corporate performance decreasing with golfing ability. Ironically, the chief executives weren’t penalised – the better they play, the higher their pay.

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